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The new normal of carbon pricing: Ontario to unveil a cap-and-trade system in an effort to reduce greenhouse gas emissions

On April 13, 2015, Premier Kathleen Wynne announced that Ontario will enter into a cap-and-trade agreement with Québec in an effort to curb greenhouse gas (GHG) emissions in Ontario. Premier Wynne’s announcement marks the beginning of a consultation process that will span several months and will shape the details of the cap-and trade system. While the mechanics of the system have yet to be determined, some broad highlights have been announced.

At present, the Ontario Environmental Protection Act allows for the establishment of “market-based approaches, including without being limited to emissions trading” by way of regulation.

Discussion

The announcement of April 13, 2015 is an important next step for the Government of Ontario in the development of its GHG emissions reduction strategy (see our previous Osler Update of February 21, 2013 for additional background). However, the details of how the cap-and-trade system, and in particular the sector-by-sector approach, will work remain murky. The Ontario Government has stressed that it will assist certain sectors such that they will not be put at a competitive disadvantage by the cap-and-trade system (for example, in Québec, free emissions credits have been provided to certain industries). One of the biggest challenges will be to ensure that the allocation of permits between sectors and within sectors is fair and does not cause undue hardship. For example: (a) how will early responders be treated; (b) will the economic impacts be evenly distributed? It may be more expensive for some sectors and businesses to reduce emissions. This is an issue that will likely be closely scrutinized by the business community unless the ultimate costs are inconsequential.

The increased costs faced by businesses will likely be passed on to the ultimate consumer. Nonetheless, the Ontario Government has made it clear that carbon pricing is coming to Ontario and has given notice that businesses must adapt to this new reality. Like any government-created market, there may be opportunities for businesses to profit from the system, particularly those who actively reduce their GHG emissions and can become net sellers of their carbon credits. It is expected that law firms will be busy assisting industry in making submissions during Ontario’s consultation process and helping industry adapt to the new cap-and-trade regime when it is unveiled. While businesses anxiously await the details of Ontario’s cap-and-trade system, they must also begin preparing for the “new normal” of carbon pricing in Ontario.